POLAROID FAR EAST LTD v. BEL TRADE CO LTD AND OTHERS

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JUDGMENT

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Hunter, JA :

1. This appeal is brought against aspects of the judgment of Deputy Judge Cruden given in this action on 31st January 1989. The first and second defendants appeal against the judge's award of damages. The plaintiff cross appeals against the judge's dismissal of its claim against the third defendant.

2. The facts as found by the judge can be summarised as follows. The plaintiff distributes Polaroid products in a number of countries in the Far East including Hong Kong and the PRC. The parent manufacturing company Polaroid Corporation, USA, imposes a rigid pricing policy based upon its assessment of the competition and of the market capacity in each country. This policy produces quite wide fluctuations between the prices at which the same products are sold for distribution in and to different countries. The basic price was Hong Kong ex warehouse. This was discounted to varying degrees for sales to other countries.

3. The PRC was one such country. By the end of 1984 the plaintiff had failed to make much inroad into the PRC market. It was looking for an opportunity to increase its share of this substantial potential market, and for this purpose was prepared to sell product at a specially discounted price. It was however only ready to do this to a buyer who was an established China Trader with knowledge, experience and connections in that market, and who could be trusted to sell in and to develop that market and not to abuse its discounted price by re-exporting and re-selling the product elsewhere.

4. The 1st defendant (Bel Trade) is a Hong Kong company owned and controlled by the 2nd and 3rd defendants. The 2nd defendant owns 90% and the 3rd defendant 10% of the issued capital. They were the only directors. By their joint defence they admitted "that they were and are in overall charge and control of the affairs, dealings and business of the 1st defendant" and that in its dealings with the 1st defendant the plaintiff "dealt exclusively or almost exclusively with" them. Bel Trade was a China Trader. It attracted the attention of the plaintiff when it was identified as the sub-buyer of a quantity of the plaintiff's product for sale in the PRC. After a number of preliminary meetings, the plaintiff's general manager, Mr Joseph Ho, called a high level meeting for the purpose of satisfying himself as to Bel Trade's experience and integrity. This took place in late October or early November 1984 at Bel Trade's premises. It was attended by Mr Ho and two of his executives and by both the 2nd and 3rd defendants.

5. At this meeting the 2nd and 3rd defendants convinced Mr Ho that Bet Trade was an experienced China Trader of integrity by representing, on the judge's finding, that the plaintiff's product would be sold to and used only in the PRC, and would not be exported or re-exported to any area outside the PRC.

6. In reliance upon these representations which the judge found to be continuing representations, the plaintiff between 30th November 1984 and January 1986 entered into a series of contracts with the defendant for the supply of 600 film, a basic film used in Polaroid cameras. In addition to a special PRC discounted price which the plaintiff allowed from the outset, Bel Trade received for purchases above specified quantities further price discounts and free goods in the form of cameras. In all the plaintiff caused to be shipped to the PRC and sold to Bel Trade 712,785 packs of film. In February and March 1986 Bel Trade placed three orders for very large quantities of the same files with the plaintiff, which orders the plaintiff declined to fulfil when it discovered the truth.

7. The truth was, as the judge found, that Bel Trade was trading fraudulently and dishonestly from the outset. Its representations were false. In the judge's words : -

"Bel Trade had clearly devised an elaborate and deliberate scheme to buy film in Hong Kong at low PRC export prices and then re-export it via the PRC and Hong Kong to higher priced North American and European markets".

Very late discovery by Bel Trade revealed documentary evidence that no less than 96% of Bel Trade's purchases were re-exported, on occasions under arrangements made before the original shipment. The judge accordingly found Bel Trade guilty of fraud; held that the plaintiff was entitled to rescind the contracts both executed and executory; and that Bel Trade was liable to the plaintiff in damages.

8. The plaintiff's claim in damages contained in Schedule 1 to its Statement of Claim, was based upon the value of the 600 film and of the free cameras delivered to Bel Trade calculated at the equivalent Hong Kong dealer's price ruling at the material time, less the price paid by the defendant. The total difference was US$2,118,426.81. The plaintiff's virtually unchallenged evidence at trial was that 600 film was that most widely used in Polaroid cameras. It was described by Mr Ho as "highly saleable" in all the plaintiff's markets. It had a limited shelf life, so deliveries from the United States had to be related to demand, actual and anticipated. The plaintiff produced its 1985 and 1986 pricelists, covering all Polaroid products in Hong Kong and in the South-eastern Region together with specimen invoices. The plaintiff's documentary and oral evidence showed that the prices in Schedule 1 were based upon the ex-warehouse prices that Hong Kong dealers had to pay and paid for the plaintiff's products in those years and upon the maximum discounts available to such dealers who purchased in large quantities. At the end of his evidence explaining the figures, the plaintiff's finance manager, Mr Lam Yu Chiu, contrasted what he called "our sales figures of Polaroid products for the years 1981 to 1987, which he said, were 1984 approximately US$15 m; 1985 US$18 m; 1986 close to US$20 m and 1987 US$25 m" with Bel Trade's total purchases of US$1.7/1.8 m in 1985 and US$1.9 m in 1986. Beyond that no specific Hong Kong turnover figures or values were investigated. Upon this evidence which he must have accepted the judge awarded the plaintiff damages in the sum claimed.

9. It is accepted that for fraudulent misrepresentation "the object of damages is to compensate the plaintiff for all the loss he has suffered, so far, again, as money can do it" per Lord Denning MR in Doyle v Olby Ironmonger Ltd [1969] 2 QB 158, 167. By reason of this fraud, the plaintiff was induced to part with 600 film at a specially discounted price and with some "free goods" for nothing. Value in such circumstances means "real or actual value ... or in other words ... the price which ... the property would have fetched as between reasonable and honest sellers and purchasers" : Spencer Bower Actionable Misrepresentation 3rd Ed. para 208. These goods were obtained in Hong Kong. The dealer's listprice there, albeit by reason of the plaintiff's monopoly fixed by the plaintiff, was the price at which "reasonable and honest dealers" bought. It was the only price at which Bel Trade, had it behaved honestly, could have bought. The judge accordingly accepted that it represented the true value of these goods.

10. Mr Swaine, QC, who did not appear for or conduct the defendant's case at trial, attacks the judge's conclusion in three different ways. The true value he submits is : -

I will deal with these submissions in turn.

11. There were two aspects to the argument. First, Mr Swaine appeared to take a pure quantities point, and to suggest that the plaintiff could recover damages only in respect of the quantities which it could prove it could have sold in Hong Kong. Since this necessarily led to the conclusion that Bel Trade would pay no damages at all in respect of the suggested balance the point was abandoned. The position is that Bel Trade obtained this quantity by fraud. No part has been or can be returned. The quantity is simply the product of Bel Trade's misconduct. At most Bel Trade can argue quantities in relation to value but not quantities alone.

12. As regards quantities in relation to value, all the defendants pleaded that the values shown in the plaintiff's damages schedule were not appropriate for the quantities ordered. From my summary of the evidence it can be seen that the plaintiff met this by proving the maximum discounts available to Hong Kong dealers; the ready saleability of the film in question; and the relationship between the total turnovers. The defendants chose to challenge none of this evidence. There was no suggestion that this film was in any way difficult to sell. There was no suggestion that the quantities purchased by Bel Trade would have swamped the Hong Kong market; been difficult to sell in Hong Kong; or still less have been unsaleable in Hong Kong over any particular period of time. Nor was it suggested that the quantities purchased by Bel Trade were in any way exceptional by the standards of Hong Kong dealers such as to enable Hong Kong dealers to obtain or claim greater discounts. I can only conclude that the matters about which this court has been invited to speculate were recognised by the defendants' legal team in the court below as having no foundation in fact or as being of no value to the defendants or both.

13. In my judgment the plaintiff lead sufficient evidence to entitle the judge to conclude that the quantity of product obtained by Bel Trade was properly valued by the plaintiff in the sum awarded. I can see no ground for interfering with this award.

Cross Appeal

14. In addition to its claim against Bel Trade, the plaintiff claimed damages against the 2nd and 3rd defendants personally upon the basis that "they directed or procured a commission" of the fraud in the language of Atkin LJ in Performing Right Society v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1, 14. The plaintiff's case was that as they admitted in their pleading these defendants controlled Bel Trade and in its dealings with the plaintiff "were" Bel Trade; that on the facts they jointly made the representations complained of; and that by necessary inference were the knowing creators of the "elaborate and deliberate scheme" found by the judge. The judge found the case proved against the 2nd defendant personally. But in relation to the 3rd defendant he concluded : -

"Although present for periods during some of the early meetings between the parties, any participation by her in the negotiations was limited and falls short of establishing personal liability".

15. Mr Geoffrey Ma for the plaintiff challenges this conclusion on four grounds. First, he draws attention to the judge's failure to refer to the joint defence, and submits that he failed to have sufficient regard to the admissions there made by these defendants, and to the fact that the 3rd defendant joined with her husband and Bel Trade in making pleas in confession and avoidance "explaining" re-export which upon the judge's findings were clearly false. The defences and the defendants' whole conduct until a very late stage of the trial seemed to me to justify Mr Ma's comment that they chose to stand or fall together. The late stage was the re-examination of the 2nd defendant when he sought to distance the 3rd defendant from the case and to give the sort of evidence she failed to give.

16. Secondly, Mr Ma submitted that if the judge's conclusion is intended to amount to a finding that she was not party to the representations made by the 2nd defendant, this conclusion is not consistent with the pleading and with the judge's acceptance of the evidence of Mr Ho in preference to that of the 2nd defendant. It is true that the 3rd defendant had played little part in the preliminary meetings, but at the crucial meeting described by Mr Ho he said that she was present for 90% of the time and that she "reiterated" the 2nd defendant's points. In cross-examination the 2nd defendant agreed that D3 "reinforced" the points he made, but claimed that this occurred only during the brief period she was at the meeting which he put at about 10%. Upon the judge's finding this evidence leaves her reiterating or reinforcing D3's points for 90% of the meeting.

17. Mr JJ Swaine for the 3rd defendant pointed out that Mr Ho did not attempt to identify what was said in her presence and what was not, and suggested that she might have been absent when certain answers he emphasised were given. But reading Mr Ho's evidence as a whole it seems to me clear that the whole meeting was directed to investigating the experience and bona fides of Bel Trade. Mr Ho made this clear in an answer in cross-examination given shortly before those relied upon by Mr Swaine. When asked to say upon what he called the 2nd defendant's "guarantee" that he would only sell in the PRC, was based, he said it was : -

"Not on one statement but all the answers he gave to all the questions I asked to establish (the) ultimate destination of the goods".

In all the circumstances it is difficult to conclude that the 3rd defendant was not party to these representations.

18. Thirdly, Mr Ma submitted that the 3rd defendant's admitted position in the company raised a clear inference that she was at all times aware of the re-export policy. This it was suggested was supported by her conduct in May 1985 when she enlisted Mr Ho's help in aid of an exhibition intended to boost the role of Xianmen Intelligence and Information Development Company as a major customer. This company in fact, as the judge found, was party to and assisting in the re-export scheme from the outset.

19. Finally, Mr Ma submitted that the 3rd defendant's failure to give any evidence explaining her role made it easier to draw an adverse inference against her. He relied upon Jones v Dunkel 191 CLR 298, and on the pointed dictum of Windeyer J at p 319 : -

"Silence may amount to much more than an acquiescence in the primary facts. It may be eloquent in support of an inference to be drawn from those facts".

20. Having carefully considered these criticisms and the submissions persuasively put before us by Mr Swaine on behalf of the 3rd defendant, I am unable to uphold the judge's conclusion. It seems to me that upon this pleading and this evidence the 3rd defendant was party to the fraudulent representations made and is as personally liable to the plaintiff as is the 2nd defendant.

21. For this reason, I would dismiss the appellants' appeal; allow the plaintiff's cross appeal; set aside the judge's costs order in favour of the 3rd defendant; and direct that judgment be entered for the plaintiff against the 3rd defendant in the sum of US$2,118,426.81 with costs.

Penlington, JA :

22. I have read the judgment of Hunter JA in draft. I agree with it and the orders he proposes on the appeal and cross-appeal.

23. It is, in my opinion, not necessary for the plaintiff to show a market for 700,000 packs of film in Hong Kong. Neither the plaintiffs or the defendants ever envisaged the sale of any of this film in Hong Kong as it had been deliberately packaged for sale only in China.

24. It seems to me that on principles now well settled the parties should be restored as far as possible to their position if the fraudulent representation had not made. The film cannot be returned to the plaintiffs and the level of damage is the difference between what they would have charged the defendants for delivery in Hong Kong, without any conditions as to resale, and what was in fact charged because of the false representation. The defendants chose to buy film in Hong Kong, from the Hong Kong dealer and thereby also must be taken to have accepted his dealers price as being the market value. On the authority of Smith Kline and French v Long it is not open to them to substitute the replacement price from the plaintiff's suppliers. They are liable for the difference between the discounted Hong Kong dealers price and that which they actually paid. That indeed does not seem to have been seriously challenged in the court below.

25. I also agree that the 3rd defendant is also personally liable to the plaintiff. This conclusion seems to me to be inevitable on the pleadings, which the trial judge did not appear to consider, and on the evidence.

Liu, J :

26. I gratefully adopt the statements of facts given in the judgment of Hunter JA, a draft of which I have had the advantage of reading. As for the appeal, I content myself with a brief outline on what I perceive to be the correct approach to assessment of damages on the evidence.

27. It is accepted that damages for fraudulent misrepresentations are to be measured as if the misrepresentations had not been made and "the objective of the court is to put the plaintiff, as far as it is possible, into the same position financially as if he had not entered into the contract at all". Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 171 Letters E-F, per Sachs LJ. See also para 436, p 289 Vol 1 Chitty on Contracts, 26th Ed. and para 1718 at p 1089 McGregor on Damages 15th Ed. Underpinning this objective is restoration in the sense of compensation, not punitive damages. See Spence v Crawford [1939] 3 AER 271, 289 Letter A, per Lord Wright. Denning LJ, as he then was, highlighted the general, though not universal, rule that the party defrauded is to recover "the loss he has suffered, no more and no less". Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246 at p 253.

28. For measure of damages in this appeal, the line taken by counsel for the plaintiffs in Smith Kline and French Laboratories Ltd v Long 11989J 1 WLR 1 at p 7 Letters F-G has much to commend itself, that is to say: on what "footing the plaintiff could have sold" the over 700,000 Polaroid films? It may not be wholly out of context to quote an observation of Slade LJ in that case at p 8 Letter DIE: "It would be a dangerous and potentially misleading generalisation to say that the measure of damages would be the same in all cases". But the test suggested in Smith Kline seems to cater for the commercial reality brought about by the varying prices set by Polaroid for its different territorial outlets.

29. That there existed a market price in terms of the "Hong Kong Dealer Price" is not disputed. The set "Hong Kong Dealer Price" presupposes an available market in Hong Kong for Polaroid films of this type. Indeed, the plaintiff sold locally 261 packs in four invoices. The over 700,000 packs were literally perishable goods, and utility was governed by a time frame. The question that lies at the heart of this appeal is, therefore, the size of the market at the material time. In other words: could the Hong Kong market have consumed, within a comparatively short period, such a large quantity of over 700,000 packs? The plaintiff ought to have established that they could have succeeded in selling this quantity with a given life-span locally "without difficulty". See Smith Kline and French Laboratories Ltd v Long, supra. at p 12 Letter D/E, per Slade LJ "There was an extensive demand for" the ulcers pills in Smith Kline (p 7 Letter D), and its decision should be read in that context: market capacity was not there at issue. But just as sales of insubstantial quantities on relatively few occasions in Smith Kline (p 12 Letter B/C) could not establish the market price, the sales of 261 packs representing only 1/3000 of the total quantity involved in this case are no evidence that the entire volume could have been traded or underwritten here at the Hong Kong dealer price. As a matter of proper inference, the reverse is true.

30. The Polaroid films were ordered and despatched exclusively for the China market. It cannot be assumed against these defendants that there was any purchaser of such a volume for the Hong Kong market as in the case of Strand, supra. p 257. No point was taken on market capacity before the trial judge, but it has not been suggested that these defendants are precluded by admission or otherwise from ventilating it on appeal.

31. There were disparities in the prices set by Polaroid for various territories. The plaintiff must adduce evidence to establish on what footing they could have sold such a large quantity of over 700,000 packs fictitiously left in their possession, if the fraudulent misrepresentations had not been made. Thus the capacity of the Hong Kong market in consumption should have been proved. Such evidence is lacking, and there are no or no sufficient facts from which market capacity could be reasonably inferred.

32. If the capacity of the local market could not have wholly coped with a quantity as large as over 700,000 packs, further evidence should have been led as to what other footing on which the remainder could have been disposed of to reflect the worth or true value of these films as a real loss to the plaintiff. At least the plaintiff "must provide sufficient evidence to enable the calculation to be made as a matter of clear inference from proved facts. It is not enough to leave the issue to a process of speculation or judicial intuition". Newark Engineering (NZ) Ltd v Jenkin [1980] 1 NZLR 504, lines 29-31 p 508, per Woodhouse J.

33. It may be assumed in this case that the combined capacity of the world market could have comfortably absorbed this enormous quantity. On the other hand, the local sales of 261 packs at the material time were indicative of a very modest level of local consumption for this type of Polaroid films. Even with evidence of an estimated volume which could have been handled by the very limited local market, it would still have been incumbent upon the plaintiff to adduce further evidence as to the price at which the undisposed of balance of these over 700,000 packs could have been realised forthwith in other venues. In my view, the plaintiff has failed to prove damages at US$2.1 m or at all.

34. Two matters were not canvassed at the hearing of this appeal: first, if only for the fact that in this appeal the plaintiff has time and again shifted its attack at the rationale for the assessment made by the trial judge, justice may well be best served by ordering damages to be reassessed rather than leaving the plaintiff with only the equitable remedy of account. However, this route has not had the benefit of mature or joint deliberation. The remaining point is: if it should prove impossible to assess damages in accordance with the usual norms (but it does not seem to be likely here), measure of damages could take a more liberal form (Smith Kline, supra. p 8 Letter D/E) and a variety of tests may be attempted for "the best available test of value according to the circumstances" (Caxton Publishing Co Ltd v Sutherland Publishing Co [1939] Ac 178 at p 192, per Lord Roche). In that situation, tests will naturally have to be devised and applied with "a degree of flexibility" (Smith Kline supra. p 8 Letter G. See also McGregor on Damages, 15th Ed. para 1299 at p 808).

35. To the extent I have stated above, I would allow the appeal. I would set aside the damages awarded and, subject to what I have said, order damages to be reassessed. I agree with all that has been said by Hunter JA in the cross-appeal on liability and the order for costs he proposes to make.

Hunter JA :

36. In handing down this judgment, we also made an order nisi that the appellants and the 3rd defendant pay the respondent's costs of this appeal.